tv [untitled] May 14, 2012 7:00pm-7:30pm EDT
you. we have talked in the past about the importance of manufacturing your region was obviously a major manufacturing center. the last 35 years the share of gdp of manufacturing and financial services basically flipped. 30 years ago, manufacturing was 25% plus of gdp. financial services about 10%. those numbers have more or less reversed since in more modern days. to what do you attribute the growth? is this benefitting our country? give me thoughts on sort of how it happened and how federal policy may have contributed to it. >> well, it's relative to the manufacturing side. a whole host of considerations in terms of international competitiveness and all these sorts of things. but in the financial industry, it's clear that if you provide a
subsidy to an industry as we have the financial industry in terms of the larger institutions, that is when we passed the act, we allowed these high-risk activities into the safety net, which is a subsidy. it allowed them to, number one, leverage up and to become larger than they otherwise would have because they could take on, number one, greater risk, less capital required to bring their balance sheets, and they did, and those are the kinds of things that contributed to their very rapid growth and very strong drive towards mergers, consolidation, and the effect was concentration in the industry. it is partly the subsidy that is provi provided through the protection of the safety net that contributed to their advantage. you didn't have that same, and i
think wisely so, subsidies going into the the other industries. although subsidies is a big issue in the united states i realize for other industries as well. but i think for the financial industry, it was a big factor allowing them to grow and take on greater risk. >> thank you. before i move on, dr. hoenig, i'd like to submit for the record a speech in 1999. you talked about the wave of mega merger and the problem of too big to fail. you were pretty accurate there. without objections, i'd like to submit that. a few years ago, you said that when gramly whooi lee act, the five biggest banks held 38% of the assets in the financial industry. that had grow to 52%. i'd like to ask each of you a
three-part question. tell me what the growth and consolidation has meant in three ways. one, for the management seek in to understand the companies they are running. so this huge growth, what it means to people actually in charge of running these institutions. second, to the authorities monitoring these risks. how have the regulators been able to both understand and regulate these much-larger entities. and third, what it's meant to the community banks that are competing with these ever-growing mega banks. dr. dr., start with you. >> i would go back to my confirmation hearing when it was pointed out that if a bank is well managed and well supervised, it won't fail. if you think about the decade following bram lij briley, allowing these institutions to
be brought into the safety net, it encouraged through the safety net enormous increases in leverage and debt. we saw the levels decline, or the leverage increase and so we had weaker capital. very thin capital levels when the crisis emerged in 2007 and 2008. secondly, we allowed the scope, if you will, of management to, i think, go beyond its capacity. it wasn't just these very important activities of lending and payment system and intermediation that were there. now you had all these high-risk oriented broker dealer activities. so the scope of management had to be able to cross that. and that was an enormous additional level of responsibility that clearly was beyond management's ability to monitor and to control the risk. had they been able to, we wouldn't have the crisis. so it was outside their bounds. and in terms of bank
supervision, if it's beyond the manager's ability to control this risk and monitor this risk, it's a lot to ask the supervisors to fill the gap when you're pushing this risk off balance sheet. it's a lot to ask the supervisor. so whatst the effect on the community bank? it's important because when you give one sector an advantage of this very significant too big to fail safety net, then where are you going to put your funds as a medium-sized company or corporation? you're going to put it with the institution that won't be allowed to fail. that's a nice advantage if you want to grow and become more, i would say, dominant in the industry. the other thing about it is in that sense, it's unfair because it does make consolidation even more important to those largest institutions to maintain that
too big to fail. that's a disadvantage to the regional banks and i think to the community banks as well. that's how i have judge d it ovr the last decade watching this emerge. >> dr. krauzer in. >> i will try to be brief. on the management issue. going back to the examples that i had given, institutions that were very focused on a narrow set of activities, mortgage lending that didn't make them better managed or less risky. there's some large complex institutions that seem to have done well in the crisis internationally. both in the u.s. and outside of the u.s. more banks that have been more universal banks. but i think it's hard to generalize. i think it depends upon the structure of the institution itself and the supervise ri process over it. >> these banks -- sorry to
interrupt. these banks as i think dr. ho hoenig applied, in your mind, they are not too big to manage? >> not necessarily. smaller institutions were more focused that i think were poorly managed and badly managed. so there's certainly some institutions that were not very well managed that were very large. so i don't want to say they had got it right. >> they rbt too big to manage? >> they could be a small institution very poorly managed, focused institutions like the ones focused on the mortgage market. unfortunately they were poorly managed nap brings us to the next step about the authorities and regulators and that this gets back to one of the issues that i mentioned in my oral remarks about pushing things into the shadows.
so in principle, if you make things transparent and simple, they are easier for the regulators to monitor. the challenges that even if we try to do that for one set of organizations, that doesn't mean the risks disappear, as was made clear in his very interesting proposal. he wanted to focus on not just the banking system, but also the shadow banking system bhp you put restrictions on one piece, there's a tendency for those to occur elsewhere. we sometimes would joke about the problem that you push down the the mole that pops up from this game in one spot, but it pops up somewhere else. the risk doesn't disappear. either off balance sheet or close to the bank. but it's not clear to me that we can make the system easier for the regulators if one set of
institutions may be have fewer activities. but a lot don't disappear, be are taking place in the shadows. tom's view we should not be having subsidies to one type of institution versus another institution to use the public to try to unbalance the competitive landscape is inappropriate. it's not fair and not good policy. we certainly want to try to reign in any particular subsidies being given to one type of institution versus the other to retain the robustness. >> and do you agree in terms of the advantages that large banks get over small banks in terms of
the way the system has been built? >> the community banks are in the largest institutions or three or four institutions that are focused internationally on very large lending. there are subsidies on the smaller bank side from some of the safety net. i think a careful cost benefit analysis should be done to identify where the subsidies may be and as much as possible eliminate them because it's unfair and not good policy. >> do you agree that there are different consequences if a small bank fails versus a large bank fails.
so if it's just an isolated institution, there's a problem with that one institution, that's one issue. but if you have a thousand institutions that are all doing the same business and exposed to the same risks and if one goes down, that's the same as a thousand of them going down, it may not make that much of a difference. >> thank you. >> thank you, mr. chairman. dr. hoenig, thank you for the time we spent yesterday. looking forward to the hoenig rule one day. you made comments earlier on about dodd-frank itself.
>> when you say that what is it in particular that you're referring to if you can generalize? >> what i'm saying to you is if if we have the resolution, we also have the view that this new legislation will eliminate future crisis that we have out there. and i said i'm skeptical and i think skeptical is healthy in the sense that 30 years of asserting that we have no institution too big to fail is something we need to be aware of. but the real advantage is it makes us more resolute to make sure we take them into either
bankruptcy or receivership going forward. now we have even larger institutions accumulating greater risk and concentration, so the will part will be even more difficult to come forward. what the proposal i put forward says is let's take these high-risk activities and let's move them out into the market and let the market be the judge there. and the part that was meant to be protected by the safety net, the payment system, the settlement system, the intermediation process, let's allow that to continue to be protected. but we take these others where the subsidy has allowed the leverage to move up and take that away, then dodd-frank becomes even more, i think, powerful in the sense of resolving institutions that in fact fail with the next crisis. and i think that's where we have
an opportunity to strengthen our hand going forward. and i want to comment on the fact that if you -- people say if you take this away, we won't be as competitive, but in the '80s and '90s before the repeal of glass-steagall, the united states had the most vibrant banking and capital markets in the world. people came to us to get the financing. every bit as much as anywhere else in the world. when i say move them out, i don't mean let's eliminate market marking, i'm not saying let's eliminate trading, i'm saying let's put it into the market where it can meet the market test and be competitive. and where the greatest innovation will come from by putting it together and putting that subsidy around it, i think you inhibit our ability to compete in the world today in a vigorous and in a capitalistic sort of way, and that's my whole point to this proposal. >> i know we had a lot of discussion around federal reserve rule 23-a and i know we're going to talk about that
some more later because there is a firewall that's been created from the standpoint of money flowing back and forth and i look forward to future conversations there. but your approach is -- what you're saying is you don't think congress should even consider arbitrarily limiting the size of an institution. you think that separating one type of activity from the basic, you know, activities that banks did originally, you think separating those two is probably the best route to take, and over time, because of that separation, the size issue will resolve itself. is that correct? >> yes. i'm saying that if you try and resolve it by arbitrarily putting a size limit on, what's your principle for that? is it antitrust? what is it? when you say let's move these out, if you take these high-risk activities and move them out and make them subject to the market where they can fail, i think that becomes its own, if you will, control system. in the commercial banking, we're going to have large
institutions, we always have. but at least it allows the regional bank and the community bank to compete on a more equal footing. this country has always had very large institutions to very small in the financial side and it's paralleled our industrial side. large industrial to small. we've been able to meet a broad cross section of each. we're now moving into fewer and fewer institutions where everything has to take place and i think that disadvantages the vibrance of the united states, our entrepreneurial spirits that come from local financing, and i think it compromises that because it focuses everything on fewer and fewer banks over time. that's what we want to avoid. and i think we will always have large institutions, but when you level the playing field, i think you also allow for a continuation of having small to medium to regional institutions competing and providing credit in the market. i think not -- not separating out the subsidy to the largest
institutions handicaps the rest of the industry and i think handicaps, if you will, main street america. >> well, listen, thank you. again, i really enjoyed the time and look forward to furthering our conversations. i know the last two witnesses have referred to the resolution piece. and while it didn't end up perfectly, that's certainly an area that i know myself and senator warner spent a lot of time on and hopefully officials will have the courage to put a bank out of its misery if it fails. i know the tools certainly have been given there. and i think there's some more evolutions that need to occur. some of the bankruptcy components that we were not able to get into the bill should be there. dr. kroszner, you spoke about in your testimony, you made comments about cost/benefit analysis. i'm hearing out there in sort of the world of people dealing with regulators, that there really aren't appropriate cost/benefit analyses being done on these
rules and there are many people that are predicting a plethora of lawsuits down the road as these rules actually come into play because the regulators are not adhering to congressional mandates of ensuring that there are cost/benefit analysis. i'm wondering if you are hearing the same thing? >> i think it's extremely important to focus on cost benefit analysis. it has bipartisan support. i was recently reviewing the executive orders from president reagan and president obama on this issue and it's really quite surprising how similar they look. i think there's agreement across the aisle that to make good policy, you have to think about the costs and the benefits. obviously there have been a number of lawsuits that some regulators have lost recently because they haven't properly done economical analysis. i think it's very important to do that. i think that should be the focus of both thinking about what the objectives are, thinking about what the relevant alternatives are and then doing as best a job
as possible. it's never going to be perfect because you're trying to predict the future. you don't have the future data. but you can draw on historical analogies, international analogies and different economic theories to try to get a feeling for what would make the most sense to try to address the objective that you have. i think that's very important because one of the disciplines that cost/benefit analysis does, it asks you what are you trying to achieve. sometimes people just have various objectives that are not well specified, not well focused, but it forces the policy process to address that. so the more that they do, the better it will be. >> let me ask you this, what do you think is driving many of the regulators that are promulgating these rules, what is driving them, especially around dodd-frank, not to be doing what they have been mandated to do as it relates to cost/benefit analysis. dr. hoenig, if you want to weigh in on that, because i do think these rules are going to be on
their way for years. we've done anything but create predictability at a time when people talked about predictability. as a matter of fact, you'd have to wonder what congress' intent was with all of dodd-frank when it was put in place from that standpoint. but what do you think is driving regulators to ignore this cost/benefit analysis and set themselves up for major setbacks down the road? >> i'm hoping that they're not. i'm not privy to the internal processes so i don't want to say anything specific about any particular process, but i think a lot of regulations -- a lot of regulatory processes, more than 100 i believe, were set in train by dodd-frank with a relatively tight timetable, so that perhaps may have put some constraints on the ability to take as much time to gather the data and do the analysis that's necessary. this is one of the issues that's come up with the many questions that were in the volcker rule proposal. a lot of them involved requests for data, which i think is
exactly the right thing for the regulators to do. and if it need be that it takes a little bit more time to do the analysis to be able to draw the lines appropriately to really try to minimize unintended consequences and increase the robustness of the system, i would be sympathetic to allowing more time for that. >> i would offer this, i'm only getting involved in it in the last month. but i would share this observation. there's two complaints that i see coming forward, that they're not moving fast enough and that they're moving too fast. and i do think that they're being very careful, because i think most of the regulatory authorities understand the law of unintended consequences, have seen it and are worried about it and, therefore, are trying to be very deliberate. i know from experience that cost/benefit analysis is very time-consuming and very slow. i think that's one of the reasons that for some this has been going slower than some people would like. so i think there is a sincere
effort to get this right, but it is -- it is a big piece of legislation. there are a lot of moving parts in it. it's probably going to be hard to satisfy everyone when we get through with this. >> thank you both very much. >> thank you both for joining us, dr. hoenig. thank you and thanks for your service. dr. kroszner, thank you very much for joining us. >> thank you. coming up on c-span 3, a look at recovery efforts from last year's earthquake in japan. then the house armed services committee set out the defense department's policies and programs for the next fiscal year. the bill will be on the house floor wednesday. and later a discussion about russia's government and the future of vladimir putin.
live coverage here on c-span 3 of several senate hearings on tuesday. the subcommittee on primary health and ageing will hear testimony about efforts to award innovation. then at 1:00, the senate subcommittee on human rights will hold a hearing on the developments in the chen guangcheng case, the blind chinese human rights activist seeking asylum in the united states. he's currently awaiting travel documents to come to the u.s. over the past year, c-span's local content vehicles cities tour has taken book tv and american history tv on the road from tampa to savannah, birmingham and baton rouge, and last month in oklahoma city. the crews have visited the pl e places that define literary life. june 2nd and 3rd, watch for our special programming from
wichita, kansas. saturdays this month, c-span radio is airing more from the nixon tapes, secretly-recorded phone conversations from 1971 to 1973. this saturday at 6:00 p.m. eastern, hear conversations between president nixon and white house council and key advisor chuck coleson who passed away last month as they talk about george mcgovern. >> in washington, d.c., listen on 19.1 fm. a year after a japanese earthquake and tsunami that spurred the meltdown of three
nuclear reactor, the heritage foundation hosted a panel discussion looking at recovery efforts, the long-term impact from the disaster, and some of the lessons learned. this is an hour and a half. good afternoon and welcome to the heritage foundation. as director of lectures and seminars, it's my privilege to welcome everyone to our auditorium and to welcome those who join us on our heritage.org website on all of these occasions. we would ask if our guests in house would make that last courtesy check to see that cell phones have been turned off. our friends from c-span and our own recording crew would be very grateful. we will post the program within 24 hours on our website for everyone's future reference and of course, those watching us via the internet are welcome to send their questions at any time,
simply e-mailing us. hosting our program this afternoon is steven buchy. he's our senior research fellow for homeland security and the center for studies. he focuses on cyber security and special operations as well as defense support to civil authorities. dr. buchy served for three decades as as a pentagon official, commander of the third battalion fifth special force, had e led deployments to south asia and the persian gulf. in july 2001 he assumed the duties of military assistant to defense secretary donald rumsfeld and worked daily with the secretary for five and a half years. retiring from the army in 2005, he continued at the pentagon in a civilian capacity as secretary of defense for homeland defense in american security affairs. before joining us here this
year, dr. buchy was a lead consultant to ibm on security policy. please join me in welcoming my colleague, steve buchy. steve? >> good afternoon and welcome to the heritage foundation. we are really glad to have everyone here. this particular subject is a very important one. it -- a year ago, the heritage foundation wrote a really fine report on the tragedy that occurred in japan. and now one year later, they have written a new one, which is again, an excellent analysis of what went on and what we can learn from our friends and allies in japan and how they dealt with this particular trarge. what we're going to do this afternoon is have our first speaker, who will be mr. yash hoo ewoksaki from japan.
he will get up and speak to us. he will be using a translator. for those who have not had that experience with a speaker, it's a learning one. then we will bring up a panel of three other speakers, who i will introduce at that time. and at the end of their remarks, we will then open it up for q&a. i will tell you ahead of time, i get kind of draconian with q&a. if you stand up and start giving a speech, i will stop you. so start right off that ends with a question mark at the end of it. that's what we're here for is to learn from the panelists. and we have a really fine panel this afternoon to discuss this. so before we go any further, mr. ewoksaki is the vice director general of the ministry of land
infrastructure, transport, and tourism. he's responsible for development and management of infrastructure including highways, river facilities and ports in the tohuko region. this is a key role in the subject which we are discussing. very, very difficult portfolio in this kind of situation. so we're honored to have him here to share with us what he has learned and what he has experienced in the last year. so without further adieu and to not take any more time, mr. ewoksi, i will give you the floor. >> translator:. >> good afternoon. first, i want to thank you for offering me the opportunity to attend this. i'm especially honored to be as